FidelityConnects: Emerging markets in motion: Navigating the shifts

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Hello, and welcome to Fidelity Connects.

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I'm Pamela Ritchie. It's been a year of resets across

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emerging markets in light of tariffs and many other

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geopolitical maneuvers.

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Some regions snapped back, other regions paused

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and several introduced new policy and governance

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shifts. China, India, Korea, Mexico

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and Brazil each portrayed very different narratives.

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What drove some of these divergences and what

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could they all mean for the year ahead?

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Joining us here today for his emerging markets playbook

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is institutional iortfolio manager, Abhijeet Singh.

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Welcome, Abhi.

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Great to see you again. How are you?

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Very good. Good to be here.

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Great to have you join us here today.

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We'll invite everyone to send their questions in over the

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next half hour or so.

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I feel like the burning question here is you look at how

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well EM has done, it's part of an international story

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that's done incredibly well.

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Does it still have legs?

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That's a great question. I wish I had the answer

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for you. I think given what's been going on, what's

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driving the market year-to-date the

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the things are in place for it to continue to do well.

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We've had the dollar weaken

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early part of the year and it's remained range bound.

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Fed is likely gonna cut at some point, maybe this

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month or next month.

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The drivers remain in place that could

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drive the next leg of outperformance for emerging

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markets relative to the U.S., where the valuation

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story also remains kind of in place.

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U.S. is still very expensive relative to emerging

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markets. There are some things, as you mentioned, certain

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countries have overshot a little bit, others maybe not

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so much, and our fund is positioned to take advantage of

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that going forward.

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Just remind us of the style that you and Sam

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deploy. It's GARP so you're not necessarily

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going in and buying high flyers in EM markets, you're

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there studying at the beginning.

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Just kind of remind us of your style, ultimately, what

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you're looking for when you're looking at companies all

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over the world.

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It is growth at a reasonable price, and we value both

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those things. We look at the growth profile of a company,

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what's in the price, and then also try to see what are we

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paying for it.

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Our positioning changes over time as things

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become a little bit more expensive. The story may be

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intact for a longer period of time but things can be

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expensive in the near term.

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Great example would be companies in India.

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About a year and a half, two years ago we felt that

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they would become very expensive from a valuation

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perspective, so taking a bets down there and becoming

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actually underweight India was the right thing to do

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within the context of our process.

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Same true for China. After years

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of underperformance we felt that coming into

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the year that things could be different this year

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given the valuation differences and also

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things improving a little bit from an export orientation

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perspective and that's why we were overweight.

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But it's really bottom-up in the end.

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The idea is to think about each company, looking at it very

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closely and just making sure that we don't overpay.

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We remain in parts of the markets that have not necessarily

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been the darling, like the AI, AI adjacent

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names, and try to look for opportunities going forward

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that could generate outperformance.

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Let's go through a little bit of the year, maybe even the

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end of last year to an extent.

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I mean, China had a bit of an explosion in stock

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markets towards, basically, this time last year,

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essentially, so 2024.

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I remember you saying that you were there, you caught

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that, and it then changed some of your positioning

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around China. I wonder if we can kind of go through the

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year and fold in some of the examples of countries

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and companies that worked and didn't work.

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In light of China doing so well last fall,

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essentially, then what in terms of positioning for you?

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That original uptick basically petered off a

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little bit. Coming into the next year, or this

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year we heard about DeepSeek, all

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the announcements around DeepSeek coming out of China which

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surprised the market, had a sell-off in the U.S.

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and created a jump start in demand for

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AI related activity in

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China. Every company in their earnings call started

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talking about AI. They've been very quiet for almost two

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years because of access to chips, etc.

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Now they were finally again in the game.

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We did some trades around becoming more exposed

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to AI applications.

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Companies like Tencent and others can really take advantage

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of this if they can get these models going and become more

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efficient and more productive in their

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individual businesses.

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Same true for Alibaba, which is the

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primary provider of cloud computing in China.

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That created potential demand for them.

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The government has been focused on

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enabling exports orientation of companies.

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Companies that can benefit from their global positioning

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in certain markets, whether it's in EVs or battery

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makers, that's where the strength of the Chinese

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market has been. It's been less so about the consumption

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story, which we have taken some bets off, kind of

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a little bit more neutral in that regard because the

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domestic data has not really kept up.

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The real estate remains unchallenged there,

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the consumer is still sitting on piles

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of cash so the story has been more around expoets.

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Can I just ask you, Sorry, within that, there's been quite

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a lot of expectation from various experts

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that China would stimulate in sort of a very

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direct to consumer way

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to get that moving.

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We haven't really seen that.

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Is there a reason for that?

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We haven't, you're right.

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We have seen bits and pieces but then they kind of peter

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off and kind of disappear. They have small blip impact

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but then they're gone. I think the primary driver or reason

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for that has been that the exports have been carrying

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the market, carrying the GDP, and

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they have been able to export, as I said, EVs

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coming from BYD, they're selling like hotcakes

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in markets where they are allowed to sell, whether it's in

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LatAm, in Middle East, some in

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Europe, Southeast Asia.

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The beauty of that is that they make higher margins

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on stuff that they sell outside the domestic market.

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This is a big tailwind for these companies that

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can become leaders in

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that space.

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The government hasn't had to do a lot of stimulus.

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I suspect if that engine of growth

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slows down you will see more sustained and direct

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stimulus focused on domestic consumption

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but they haven't had to do that.

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I think that's probably what is keeping them on the

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sidelines.

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In the sense that China got a bit clobbered

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by the the tariff story in April, have they done more

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stimulus sort of for the export story rather than the

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consumer, the domestic consumer?

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Has that been the change?

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That's a fair way to say that, yes.

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The export orientation has remained

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through the process.

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U.S. is still a big market for their exports

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but it's not alone.

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It's not the primary market, they're

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expanding in other parts of the world where they can.

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Really interesting, China moving across the world.

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To what extent are you underweight, overweight?

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You say you took a little bit off there?

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We're still overweight, marginally overweight because the

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market has done really well.

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I think the next leg is gonna be wait and

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see to see how things go and progress there.

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Where we have actually remained positive and

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added to is Mexico, which is kind of a little bit

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counterintuitive. It is

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a market that has a lot of bad news priced in when

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it comes to trade as reflected in the currency, the

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USMCA likely being negotiated next year so there's gonna be

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a lot of volatility along the way.

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A lot of bad news is priced in.

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We feel pretty good that you will

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see that as a place of surprise next year to the

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market. Having exposure there to the companies that

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we have is the call to make.

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On the flip side we have taken down or gone

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underweight a little bit Brazil where we were overweight

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early this year and benefited from that when the market did

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really well but now the

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political season is up and running in Brazil, there's gonna

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be an election next year so any type of

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uncertainty that comes from there becomes a little bit hard

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to navigate so it makes sense to be a little bit on the

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sidelines.

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Their interest rates are very high there, aren't they?

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Yes.

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Where else in LatAm?

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LatAm is in focus for lots of different reasons right

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now and they trade to the world, certainly

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various countries and companies there.

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You always go company specific but is

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there sort of a country story there for you as well?

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Argentina, it appears, is getting great benefits from

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U.S. trade policies and money injections.

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Well, Argentina is not part of the emerging market

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index so it's kind of a little bit out there.

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I think, obviously, the dynamics in the economy there

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are changing so if they kind of become part

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of the universe of the emerging market index then

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we'll, obviously, look at it more closely.

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Same is true for our fund when it comes to Vietnam which is

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a a market that's done well, has been very

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interesting because it tends to benefit

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from any type of diversification that companies do on

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supply chain side from China to other countries

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but it's still not in the

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universe of countries that we look at.

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It's on our radar and I think some of our analysts

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have started looking at some of the companies there in

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anticipation of potential opportunity to

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invest there in the future.

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Hello, investors. We'll be back to the show in just a moment.

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Some countries will move out of the EM universe because they're moving up into

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the the developed market area.

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I know that Korea is working on some reforms.

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It's a place that you have invested in for some time but

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the reforms they're working on in theory lead to a more

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mature equity market system.

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Tell us a little bit about that or update us on that, where

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they're headed.

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I think it's interesting. We rely on

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benchmark providers really to kind of align

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countries with various groups of countries.

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Korea is one of those countries that is actually

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bifurcated right now.

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One index provider, FTSE,

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thinks of it as a developed market already and MSCI

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still categorizes it as an emerging market.

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They have been going through a slate of

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10 different issues that MSCI had raised a few years ago

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and tried to address them on a one-on-one

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basis but they have had some setbacks along

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the way, like the political uncertainty towards the

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end of last year, but they are working through

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it. At some point it does kind of move from

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one index to another but usually those things take

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multiple years so we're not too concerned about it.

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The interesting stuff that's happening there is around the

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value-up trade where a lot of industrial names

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and more old economy

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names have done really well in Korea year-to-date, some

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on merit and others on hope but they

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are trying to replicate Japan's

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playbook where the companies become more

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shareholder-friendly and less so driven by

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a conglomerate kind of behaviour.

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Markets are rewarding it.

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I think it's still early days, we are monitoring that, but,

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as you said, we do have exposure

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to Korea but it's not necessarily in some of these high

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flyers that have done really well year-to-date.

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Sometimes the companies are ...

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do you look into small and mid-cap within emerging markets?

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Tell us a little bit about the size of the company, how

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big it needs to be for you to take notice.

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Not necessarily. We do look at the liquidity

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profile of the companies that we invest in so we want them

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to trade 20 million daily trading volume.

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We want them to be sufficiently liquid for us to

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get in and get out as needed.

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The smaller side, it's

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not part of the index that we use, MSCI Emerging Markets

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index, and it's not part of the

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thought process, at least for this particular portfolio.

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You mentioned a bit AI at the beginning, how it's working

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its way through some opportunities in China.

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Let's fold it into sort of a broader discussion

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here.

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Certainly, in in EM TSMC has been sort

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of the story, if you want, for

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sort of the chips AI story.

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It's a very well known company.

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I think it's one over the course of the years you've been

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invested in.

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I think it's a big part of the benchmark still.

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Are these the types of companies that you're still

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interested in?

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That's interesting. I think this is where we deviate

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a little bit from the consensus.

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Beginning and middle of last year we have been underweight

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TSMC a little bit.

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TSMC went from 5 or 6% of the benchmark

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to today around 12% of the benchmark so it's a huge

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dominating position in the benchmark.

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We tend to be within constraints of our parameters

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of ±5% versus the benchmark.

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We are a little bit underweight today, mostly

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because Sam feels that the next leg

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up is gonna be more around application of

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AI rather than building the next data centre

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or the infrastructure

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investing that the governments

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and companies have been really excited about and pouring a

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lot of money into around the world.

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It's the question of who can use

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this infrastructure spend to the benefit of

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their company and their customers.

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That's where I think Sam feels that there

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is an opportunity to find those companies that are gonna

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create applications rather than at this

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point trying to still stay exposed to

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the infrastructure names.

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So that leads to

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a little bit of an underweight in information technology

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sector and also leads to an underweight in Taiwan which is,

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again, that's where TSMC is.

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That's where its base is although it's building

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out in other places, particularly in the U.S.

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Tell us about the Middle East. At one point the Middle East

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was a place that ...

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I think it was a place you weren't finding opportunities

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for a number of years. I think that's changed somewhat

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recently. I mean, we've been hearing a ton of deals being

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done in the Middle East between the Trump

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administration and sort of for the U.S.

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more broadly. In terms of investable companies,

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do you like their energy producers, do you take a look at

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sort of ... they have some interesting finance companies.

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What's of interest in the Middle East that you like to

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invest in?

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I think the story goes a little bit longer.

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Once the war in Ukraine started Russia

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was pushed out of the index so, obviously, we can't buy

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that.

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All that money, energy exposure that people needed

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they went to the Middle East so the stocks became very

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expensive. That was why for a number of years we

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couldn't find anything that would be reasonably valued.

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That has changed this year.

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We've seen Saudi market kind of underperform.

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We built a position in one name in UAE

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last year, a small position, and today we have a couple

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of names in Saudi Arabia in the portfolio, one

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bank, as you said, a private bank, and then the energy

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producer there as well on the commodity side.

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Small positions, nonetheless, still underweight the country

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but again, net net better on a [indecipherable]

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basis compared to where we've been for the last few years.

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One other area where we've increased or added

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some exposure is Turkey.

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This was also one of those

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no-go countries from an investment perspective for a number

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of years. We've seen some changes happening

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there that encourage us, whether it comes to

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central bank policy, the government policy.

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I think at the same time it's positioned really well to

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benefit potentially from any type of rebuild

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effort happening in Middle East or in Eastern Europe.

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They have a lot of capacity, excess capacity for things

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that'll be needed post war.

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When that happens they'll have a tailwind but regardless

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these are good opportunities to diversify the

[00:17:41.440]

portfolio.

[00:17:42.200]

It's always been a a land bridge between Europe and the

[00:17:44.680]

Middle East but it seems to be being discussed

[00:17:47.720]

as much more of an economic bridge as well

[00:17:51.240]

with relationships formed there.

[00:17:54.520]

That's an interesting spot. As you say, the central bank

[00:17:56.280]

has cooled out a bit. With

[00:18:00.920]

energy, is energy of interest to you

[00:18:03.880]

as a broad statement or is it just a a very

[00:18:07.080]

particular opportunity?

[00:18:10.480]

Energy sector is a very small sleeve

[00:18:13.600]

of the benchmark so it's not gonna drive

[00:18:17.280]

a lot. We did have Petrobras for a number

[00:18:20.400]

of years but, as I mentioned earlier, Brazil is becoming a

[00:18:23.280]

little bit more tricky from

[00:18:27.600]

a policy standpoint and where things might go over the

[00:18:30.560]

next 12 months so we sold out of that and then bought

[00:18:33.920]

a replacement in the Middle East.

[00:18:36.640]

Overall we are underweight the energy

[00:18:39.920]

sector, one large part of that is

[00:18:42.880]

Reliance Undustries in India which

[00:18:46.000]

is a conglomerate and that's a little bit hard to kind of

[00:18:48.960]

justify that as a position in the energy sector but it

[00:18:52.000]

is nonetheless in that benchmark.

[00:18:55.440]

That'll be an interesting storyline.

[00:18:57.280]

I'm sure we'll talk about it sometime next year as Reliance

[00:19:00.640]

kind of looks to spin off their telecom

[00:19:03.600]

business sometime next year.

[00:19:05.680]

They've started making some moves there so that could make

[00:19:09.120]

the remaining part of the company becoming a little bit

[00:19:11.680]

more energy than being a conglomerate.

[00:19:14.480]

The remaining part of the company is still a gazillion

[00:19:16.480]

different ...

[00:19:17.880]

it's cement, it's energy.

[00:19:22.920]

Retail, lots of stuff.

[00:19:24.080]

Very interesting. One of the stocks that just went to the

[00:19:26.800]

moon, didn't it? It came back.

[00:19:28.240]

Just talk a little bit more about India sort of in its

[00:19:31.760]

stock market, meaning ups and downs.

[00:19:34.880]

I mean, do you expect it to sort of catch an upswing?

[00:19:40.240]

Our thinking there has been, obviously, from a bottom-up

[00:19:43.520]

basis and that's led us to being underweight.

[00:19:47.360]

At one point which was, I think, early this year

[00:19:50.720]

we were our max underweight, which is close to 10%

[00:19:53.640]

underweight which is allowed within our parameters.

[00:19:56.960]

Today we are much less than that.

[00:19:58.960]

The reason for that is it has underperformed a lot compared

[00:20:02.160]

to the rest of the emerging market index and

[00:20:05.200]

countries so the valuation has started

[00:20:08.160]

coming down on a regular basis so it's becoming a little

[00:20:11.120]

bit more attractive from that standpoint.

[00:20:13.520]

There's still some room there.

[00:20:15.520]

We've added to some infrastructure names that we had

[00:20:18.560]

in the portfolio already, a private bank to reduce

[00:20:21.600]

that underweight.

[00:20:23.040]

I know Sam's planning to go on a trip to India

[00:20:26.400]

early next year, I think February, beginning of Feb., and

[00:20:29.520]

so when he goes and attends a conference and talks to

[00:20:32.400]

companies might come back with some more potential

[00:20:35.840]

ideas for the portfolio that could help us reduce the

[00:20:38.400]

underweight there.

[00:20:40.720]

Even after the underperformance it's still quite expensive

[00:20:44.400]

so you you gotta be cautious there.

[00:20:46.560]

The trade between India and China

[00:20:49.520]

might continue for a little while, or India and rest of EM.

[00:20:54.840]

Why is it so ex-, I think you've said, these are your

[00:20:56.760]

words, I remember you saying it's a vibrant economy.

[00:20:58.680]

That's part of the reason that

[00:21:01.760]

it's so expensive. There's a lot of hope built in there, it

[00:21:04.240]

sounds like.

[00:21:05.360]

That's correct. It's always gonna have a premium

[00:21:08.400]

by the nature of the growth level and the

[00:21:12.400]

middle class and the earnings potential that's

[00:21:15.360]

going up for the people coming to the

[00:21:18.640]

workforce. There's a huge amount of infrastructure

[00:21:21.280]

requirements. All those things are great so the long term

[00:21:23.760]

drivers remain.

[00:21:25.200]

It's just like what do you want to pay for it?

[00:21:27.040]

Some portfolio managers might be okay with paying

[00:21:30.160]

that excessive multiple, us, we

[00:21:33.120]

don't os that's what's reflecting the

[00:21:37.280]

position today.

[00:21:37.680]

Couple of questions coming in, Abhi.

[00:21:39.200]

One of them you've touched on  but let's just go back to

[00:21:42.320]

talking about investing in China and a discussion of

[00:21:45.280]

the risks of investing in China.

[00:21:47.440]

I mean, there have always been risks in terms of

[00:21:49.680]

transparency, that's nothing new, and you

[00:21:52.720]

have a way of handling that.

[00:21:54.560]

Are there layered on risks on a geopolitical basis as well?

[00:21:57.760]

Maybe talk about a couple of different risks that you face

[00:22:00.720]

when investing in China.

[00:22:03.480]

One thing that we have, which we've talked about in the

[00:22:05.800]

past, our our governance and forensic accounting research

[00:22:09.080]

that helps us navigate opacity

[00:22:13.080]

or not being able to kind of see

[00:22:16.280]

more behind what the companies are doing.

[00:22:19.800]

Having that team, two people actually in Hong Kong that

[00:22:22.840]

are focused primarily on China helps.

[00:22:25.960]

That's one side of the equation at a company

[00:22:29.160]

level to be able to do that before we invest

[00:22:32.280]

in a company.

[00:22:33.640]

The other thing is geopolitics is very tricky

[00:22:37.160]

because it's having an impact everywhere.

[00:22:39.720]

I think if we go back to April

[00:22:43.000]

of this year we would have probably all

[00:22:46.280]

sold everything and put everything in

[00:22:50.040]

our mattress. Obviously, the markets react

[00:22:53.320]

to news, they adjust to news, they

[00:22:56.520]

digest the news and then they move forward.

[00:22:59.320]

We've seen that happen a number of times throughout my

[00:23:02.120]

career and this is no different.

[00:23:05.000]

I would say, again, focusing on the individual

[00:23:08.360]

companies makes the big difference.

[00:23:11.400]

The policy, the geopolitical part is kind of

[00:23:14.360]

additional input but should not be the

[00:23:17.480]

primary driver of what companies you buy and not buy.

[00:23:22.040]

The primary driver of most EM investing is

[00:23:25.160]

India and China.

[00:23:26.760]

You've mentioned throughout this discussion that you've

[00:23:29.800]

sort of brought down exposure to both of those

[00:23:32.760]

for pretty different reasons.

[00:23:34.440]

Has that allowed you to go elsewhere?

[00:23:36.200]

I know we've touched on some of them.

[00:23:37.560]

Are there other places that suddenly you've got room to

[00:23:40.680]

take a look at other places and companies?

[00:23:44.600]

That's a great point. So we have expanded

[00:23:47.560]

a little bit more cover exposure to ASEAN

[00:23:51.320]

which has not been something that we've been invested in.

[00:23:53.800]

We bought a position in Indonesia recently, the

[00:23:57.240]

stock's not done very well.

[00:23:58.840]

The markets had some macro headwinds.

[00:24:00.720]

This is a very good, one of the

[00:24:03.720]

best run banks and it's coming at a very steep

[00:24:07.160]

discount to its history and to the rest of the

[00:24:11.000]

banking sector within EM.

[00:24:12.680]

That's one name. I mentioned Turkey.

[00:24:15.560]

We continue to keep exposure to Greece,

[00:24:19.160]

to Hungary, to South Africa.

[00:24:22.760]

Those have been there already so we've adjusted

[00:24:26.200]

positions a little bit there but those are still intact.

[00:24:29.320]

From a new area perspective Saudi Arabia, which I already

[00:24:32.280]

mentioned, and Indonesia is the other one that

[00:24:35.480]

was not there before.

[00:24:37.360]

Just a quick note for those before we close but first

[00:24:40.400]

of all, the debt markets for EM have been

[00:24:43.760]

interesting, and this is not necessarily what we're talking

[00:24:46.080]

about but it underpins a lot of investing, of course, how

[00:24:48.880]

the access to debt is going.

[00:24:51.680]

Many of the EM countries are not as

[00:24:54.880]

badly indebted, basically, as developed,

[00:24:57.840]

so-called developed nations.

[00:25:00.720]

What does that lack of debt overhang mean

[00:25:04.000]

for their economies for you?

[00:25:07.800]

I think the main thing is that the interest rate policy

[00:25:11.320]

can be a lot more dynamic.

[00:25:14.200]

That's why the focus tends to be on

[00:25:17.240]

the U.S. dollar because, again, a lot

[00:25:20.200]

of the international trade, global trade happens in USD.

[00:25:24.840]

That becomes more of a component

[00:25:27.960]

of understanding what

[00:25:30.920]

the central bank is thinking about.

[00:25:33.080]

The central bank in the U.S.

[00:25:34.440]

has to think about debt servicing cost

[00:25:37.720]

when they're thinking about what interest rate levels

[00:25:40.280]

should be. The fiscal policy

[00:25:43.320]

should be thinking about it as well.

[00:25:45.480]

In other parts of the world it's more about inflation.

[00:25:47.560]

In emerging markets more about the currency, can

[00:25:51.480]

we keep the currency stable?

[00:25:53.480]

That helps with imports, especially for

[00:25:56.440]

countries that import more than they export.

[00:25:58.720]

India does a lot of that because of

[00:26:01.720]

the energy imports.

[00:26:04.200]

The emphasis tends to be on

[00:26:07.240]

other drivers rather than the debt level.

[00:26:10.680]

We've mentioned a couple of times in this conversation

[00:26:13.880]

benchmarks and how much some have of

[00:26:16.920]

certain stocks and so on.

[00:26:18.680]

How are you guys doing against your benchmark?

[00:26:22.160]

It's been a great year. I think, hopefully, the investors

[00:26:24.800]

can see that at the website or

[00:26:28.400]

the reports of the fund.

[00:26:30.000]

It's been a very good year. Our positioning coming into the

[00:26:32.720]

year really worked out and we've added good

[00:26:35.680]

amount of value. I think the benchmark is up a

[00:26:38.640]

lot as an asset class and we've added value on top of that.

[00:26:40.720]

It's over 30% year-to-date and you're

[00:26:44.640]

higher than that.

[00:26:45.160]

We are on top of that, 3 to 4% on top of that.

[00:26:48.160]

Wow, congrats. It's fantastic to have you help

[00:26:51.120]

us close out the week.

[00:26:52.640]

Anything you'd like to just quickly share with investors as

[00:26:55.760]

we tip into another year of investing?

[00:26:59.560]

I think this is a year to kind of show you that

[00:27:02.520]

diversification works.

[00:27:04.440]

It does work. Everybody should not be in the same

[00:27:07.480]

bucket of mega-cap companies in the U.S.

[00:27:10.120]

at all times.

[00:27:12.200]

It's really proven that having that exposure

[00:27:15.800]

outside North America is the right thing to

[00:27:18.760]

do. You can't time it so that's why it should be more

[00:27:21.400]

strategic in nature in terms of allocation, and these types

[00:27:24.440]

of years make me look smart.

[00:27:29.480]

Maybe all years make you look smart, I don't know, I don't

[00:27:31.800]

know. Great to see you, Abhijeet Singh, thank you for

[00:27:33.880]

joining us.

[00:27:35.240]

Thank you. Bye.

[00:27:36.880]

Thanks for listening to the

[00:27:40.160]

FidelityConnects podcast.

[00:27:41.720]

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We'll end today's podcast with

[00:28:17.720]

a short disclaimer.

[00:28:20.280]

The views and opinions expressed on this podcast are

[00:28:23.080]

those of the participants, and do not

[00:28:26.200]

necessarily reflect the views of Fidelity Investments

[00:28:28.720]

Canada ULC, or

[00:28:31.600]

any affiliated companies.

[00:28:33.840]

This podcast is for

[00:28:36.720]

informational purposes only and should

[00:28:39.640]

not be construed as investment,

[00:28:42.520]

legal, or tax advice.

[00:28:45.360]

It is not an offer to

[00:28:48.240]

buy or sell or an

[00:28:51.160]

endorsement, recommendation, or sponsorship of any

[00:28:54.040]

securities or entities cited.

[00:28:56.280]

Read a fund's prospectus before

[00:28:59.480]

investing. Funds are not guaranteed.

[00:29:03.000]

Their values change frequently,

[00:29:05.880]

and past performance may or may not

[00:29:08.760]

be repeated.

[00:29:10.160]

Fees,

[00:29:13.160]

expenses, and commissions are all associated with fund

[00:29:14.480]

investments.

[00:29:15.760]

Thanks for watching and see you next time!